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TJX Flexes Brick-and-Mortar Muscles in a Digital World: Gadfly

TJX already has a huge fleet of stores, and it is betting that there's appetite for more of them.

(Bloomberg Gadfly)—It's back to business as usual at TJX Cos. Inc.

And by that I mean the company is once again serving a slice of humble pie to the long list of retailers that are bemoaning declining store traffic and slowing sales.

TJX, the parent of off-price powerhouses T.J. Maxx, Marshalls and HomeGoods, reported on Tuesday that comparable-store sales in the latest quarter were up 3 percent over the same period a year earlier. It also raised its earnings guidance for the full year.

That likely came as a relief to investors, who got skittish last quarter when the company recorded only a 1 percent increase on this measure after a long streak of more robust growth. And it again positions TJX as a standout in a bleak retail landscape in which the likes of Macy's Inc., Kohl's Corp., and JC Penney Co. Inc. are in a desperate fight to remain relevant.

It is a testament to TJX's leadership that the company has been thriving in such a challenging moment. But investors should not let the company's success get in the way of asking some hard questions about its strategy to keep the momentum going.

TJX already has a huge fleet of stores, and it is betting that there's appetite for more of them -- a roughly 50 percent increase, in fact.

The company says it can grow to some 5,600 outposts over the long term. In North America alone, TJX has projected that there is appetite for about 800 more stores from its Marmaxx division, which includes T.J. Maxx and Marshalls. To put that in perspective, that means it thinks it can add more outposts than comprise the entire fleet of Macy's. And it already has over 1,000 locations each of T.J. Maxx and Marshalls in the U.S.

In some ways, it makes sense that TJX is taking an approach to its store portfolio that differs from, say, Macy's or Gap Inc. or Williams-Sonoma Inc. Those competitors plan to do a hefty share of their business via e-commerce. Meanwhile, online shopping is just a small sliver of TJX's business, and it expects that to continue. In fact, T.J. Maxx and and Marshalls owe a lot of their success to the treasure-hunt-like atmosphere of their stores, which is inherently hard to translate to a digital environment.

But continuing to grow its store base so dramatically comes with risks. Sure, plenty of empty retail space is coming on the market right now. But often isn't in the most desirable shopping centers.

Researchers at CoStar Group use a metric they call "location quality score" that includes factors such as demographics and nearby competition to asses retail real estate. CoStar has found that TJX usually leases in relatively strong locations, with 22 percent of its stores in the top 10 percentile of all U.S. retail locations. But that is where space is particularly hard to come by.

This dynamic will make it tricky to execute such an ambitious expansion.

And then there are TJX's plans for the home décor and furnishings market. It's true that its HomeGoods chain has been on sizzling streak of growth. Since 2012, its annual revenue has nearly doubled, far outpacing the growth in its store portfolio. But with this brand, too, TJX thinks it can add nearly 400 additional locations to the more than 600 it already has. And that's while the company is in the midst of launching a new U.S. chain, HomeSense, in the same category.

T.J. Maxx and Marshalls remind us nearly every quarter that, even in a digital world, there are legions of customers that really like the brick-and-mortar shopping experience. And it's possible the company can continue to cash in on that for the long haul.

But there are reasons to be skeptical that the path that got TJX to this moment -- opening stores at a fast clip and running them exceptionally well -- will continue to work in an uncertain future.

TJX's recent triumphs shouldn't blind us into thinking it can do no wrong.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Sarah Halzack in Washington at [email protected] To contact the editor responsible for this story: Beth Williams at [email protected]

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